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There are two sides to every story – and value investors aim to ignore both

07/02/2017

Simon Adler

Fund Manager, Equity Value

Visitors to The Value Perspective who also read Private Eye will be aware of the work of Glenda Slagg, the magazine’s fictional gossip columnist who can effortlessly contradict herself in the space of a paragraph. The self-styled ‘First lady of Fleet Street’ will praise someone effusively only to sign off later with a trademark “aren’tchajustsickofhim” – then lay into someone else before ultimately swooning “don’tchajustluvher”.

The columns are intended to parody the inconsistencies of opinion in some areas of the media but, before anyone start feeling too smug, a similar process is of course constantly at play in investment.

Take BT – although the group seems to swing so often from market darling to pariah that even Glenda might struggle to keep up. On the one hand, you have a cash-generative, utility-type business with a focus on paying a dividend and, on the other, you have the pension schemes, the regulatory worries and, as we shall come onto a little later, the, er, focus on paying a dividend.

More recent concerns to add into the mix would include BT’s eye-wateringly expensive ambitions in the mobile space, in taking on Sky in televised sport and in investing in fibre broadband without actually knowing if the regulator will allow it to make a return. And, of course, the accounting issues in BT’s Italian division, which saw about a fifth wiped off the group’s share price when it was revealed on 24 January.

OK, so we are well towards the ‘Aren’tchajustsickofit’ end of the spectrum at the moment with BT but there will come a time when the market can once again build a more positive story around the group and its prospects. And that is a hugely important thing to bear in mind – at the end of the day, much of the noise surrounding any investment is just a story.

And while everybody loves a story, as we have pointed out in articles such as The peacock’s tale, stories are not helpful when it comes to making money. That is why it is so important to have some sort of framework to help you tune out the noise so you can think calmly and rationally about an investment – and we will shortly outline our own framework in ‘Three questions you should ask to help you survive a profit warning’.

That brings us back neatly enough to BT’s profit warning on 24 January and the two aspects of it that particularly caught our eye, here on The Value Perspective. The first was that the announcement focused almost exclusively on the Italian accounting issue - only mentioning in passing that “the outlook for UK public sector and international corporate markets has deteriorated”.

And yet in a follow-up conference call – which, to judge from the ensuing coverage of BT’s woes, few journalists dialled into – it emerged the accounting issue would hit the company to the tune of £175m while the effect of the little matter that was covered in a sentence would hurt the business by some £225m. Clearly companies as well as investors are not averse to a bit of a story.

The other aspect of the profit warning that caught our attention was BT assuring the market it still expected to grow its dividend per share by at least 10% in both 2016/17 and 2017/18. After all, some people might find it curious that any company would be so adamant it was still going to increase its dividend so soon after acknowledging it had significantly less profits from which to make such a pay-out.

That, however, would be to ignore the premium the wider market now places on companies with a solid track record of rewarding income-seeking investors. And, as we have often argued here on The Value Perspective – in 2013, for example, in Skewed priorities – any company that focuses on paying a dividend without proper regard to its earnings stream and balance sheet risks ending up making some poor choices.

In fact … we have told you a few stories today so now it is your turn. BT is by no means the only business ever to accompany a profit warning with a commitment to maintain or increase its dividend over a period of time and yet, though we have been racking our brains, we cannot for the life of us come up with an instance where such an episode ended well. If you can think of an example, please do let us know here.

Author

Simon Adler

Fund Manager, Equity Value

I joined Schroders in 2008 as an analyst in the UK equity team, ultimately analysing the Media, Transport, Leisure, Chemicals and Utility sectors. In 2014 I moved into a fund management role and have had experience managing Global ESG and Pan-European funds. I joined the Value investment team in July 2016 to focus on UK institutional and ethical-value portfolios.

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